Getting In Cheap On Davangere Sugar Company Limited (NSE:DAVANGERE) Might Be Difficult

Davangere Sugar Company Limited's (NSE:DAVANGERE) price-to-earnings (or "P/E") ratio of 31.6x might make it look like a sell right now compared to the market in India, where around half of the companies have P/E ratios below 26x and even P/E's below 15x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Recent times have been quite advantageous for Davangere Sugar as its earnings have been rising very briskly. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Davangere Sugar

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Davangere Sugar will help you shine a light on its historical performance.

Is There Enough Growth For Davangere Sugar?

In order to justify its P/E ratio, Davangere Sugar would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 170% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 239% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why Davangere Sugar is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Davangere Sugar revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Davangere Sugar (1 is a bit concerning!) that we have uncovered.

You might be able to find a better investment than Davangere Sugar. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.